Berkshire Hathaway Solidified its TEVA Position in 2018 First Quarter

Summary:

Shares of TEVA gained 4% in the extended session after a regulatory filing from Berkshire Hathaway first quarter.

Berkshire doubled its position in TEVA to 40 million shares, having first bought 18.8 million of the generic drugmaker’s shares in the fourth quarter of last year.

Berkshire owned about 40.5 million Teva American depositary receipts (ADRs) worth about $693 million as of March 31, up from 18.9 million ADRs three months earlier.

For the second straight quarter, Teva Pharmaceutical Industries (NYSE/TASE: TEVA) stock is getting the “Buffett bump.” During the past week, TEVA stock jumped more than 4% as Warren Buffet’s Berkshire Hathaway solidified its position in TEVA stock, according to their filing submitted on Tuesday to the Securities and Exchange Commission. According to this filing, Berkshire Hathaway more than doubled its TEVA stake during the first quarter of 2018 to 40.5 million shares, having first bought 18.8 million of the generic drugmaker’s shares in the fourth quarter of last year. At Wednesday morning’s opening price, that stake was worth roughly $846 million. Berkshire Hathaway, as of March 31 owned around 40.5 million of the drugmaker’s sponsored American depositary shares (ADS), worth almost $693 million at the time of the filing. Stocks often rise in price when Berkshire reveals new or increased stakes, which may explain the 4% jump in stock price following the 13F filing by Buffett.

[Source: Yahoo Finance, May 22, 2018]

A February filing revealed that Berkshire Hathaway acquired 18.9 million TEVA ADRs in the fourth quarter of 2017, at a time when TEVA stock reached a 15 year low. Following this disclosure, Buffet stated he wasn’t personally involved in the decision to buy TEVA stock. To date, TEVA stock has been declining since late 2015, as the company took multiple hits. Diminishing revenues, loss of patents for the company’s multiple sclerosis blockbuster drug Copaxone, and heavy financing for a $40.5 billion acquisition of Allergan’s generic unit Actavis, resulted in continued downward pressure on the stock’s price. Fitch Ratings Inc. downgraded TEVA’s credit ranking to junk in November, casting doubts on the company’s ability to adequately carry its long-term loans taken for the Actavis deal.

On November 1st, Teva Pharmaceutical appointed as CEO Kåre Schultz, formerly the CEO of Copenhagen-based pharmaceutical company H. Lundbeck A/S, reversing the stock’s trend. In December, Mr. Schultz announced a reorganization plan intended to stabilize TEVA’s financial situation and reduce its expenses, which included significant asset divestment and the layoffs of 25% of Teva Pharmaceutical’s employees by 2019.

TEVA stock jumped by 11% in February after 13F filings revealed that Berkshire Hathaway, the corporate conglomerate led by billionaire investor Warren Buffett, took a $358 million stake in the pharmaceutical company. Unfortunately, for investors hoping the position means TEVA was hand-selected by Buffett himself, Buffett told CNBC in February that he knew little about TEVA and was not the one at Berkshire who has been doing the buying. TEVA stock lost nearly two-thirds of its value over the past three years. In recent quarters, the company cut its guidance, suspended its dividend and announced a restructuring plan to help save cash. Teva Pharmaceutical’s most popular branded drug Copaxone, which has accounted for roughly $4 billion in annual sales, is also suffering from intense generic competition. Still, there are several things for Berkshire to like about TEVA’s business. In 2017, 57 percent of Teva Pharmaceutical’s revenue came from its own generic drug business. Sky-high prescription drug prices will likely continue to drive generic drug sales for the foreseeable future. In addition, despite all the company’s problems and guidance cuts, TEVA still expects to generate at least $3 billion in free cash flow in 2018.

Below is TEVA’s Global Generic Medicine statistics in various realms:

[Source: Teva SEC Filings]

But even with Berkshire’s endorsement, Bank of America analyst Jason Gerberry is not buying TEVA. He stated that the U.S. generic sector trends are likely to remain challenging in 2018-19, and Teva Pharmaceutical has no major new generic products coming to market in 2018. “TEVA’s generic Advair filing is not scheduled for submission until late 2018.” Gerberry says risks associated with further generic competition for Copaxone are not fully factored into Wall Street estimates.

By now, many of the figures in the 13F reports may be out of date, and this is one reason why everyday investors are cautioned against making investment decisions based on 13F filings. That’s not to say, however, that the release of 13F information to the public does not have an immediate impact. Although 13F filings relay news about the holdings of some of the biggest financial firms in the world, they come a month and a half late. February 15th was the deadline for 13F filings from hedge funds and other firms managing at least $100 million in assets under management. These reports document the positions those firms held as of December 31, 2017.

[Source: Teva SEC Filings]

According to TEVA SEC estimates from last year, expected CAGR growth for US generic drug sales is 5%, 10% for Growth Markets where the majority of TEVA growth is projected, 6% for the EU + Japan, and 9% for China. Such estimates form TEVA’s promising growth outlook for future years in various geographic regions, where evidently more growth is projected for the Growth Markets.

Buffett’s 13F filing for the fourth quarter of 2017 indicated that Berkshire Hathaway held 18.9 million ADRs of TEVA, a stake valued at about $358 million. When the 13F information became public on Wednesday, shares of TEVA experienced an immediate uptick in value in trading. It’s unclear if Berkshire Hathaway still holds a position in TEVA right now. The 13F report indicates only that Berkshire had $358 million in TEVA as of December 31, 2017. Nonetheless, the news that Buffett was at one point fairly heavily invested in the pharmaceutical company was enough of an indication to the broader investment world that the stock was worth buying that its value shot up in just a few hours.

Jana Partners Also Added TEVA

Berkshire Hathaway was not the only financial firm to buy into TEVA stock in the fourth quarter of 2017. Jana Partners, the investment firm of hedge fund billionaire Barry Rosenstein, also made a sizable purchase of TEVA over the same period. Rosenstein bought up about 3.5 million shares of the pharmaceuticals company, according to his fund’s 13F report. 13F filings do not present a full picture of the holdings of a hedge fund. Funds typically have other assets which are not included in 13F reports. Because of this, and because of the backward-looking nature of 13F timelines, investors should be cautious when basing investment decisions on this information.

Conclusive Thoughts:

The belief appears to be that Teva Pharmaceutical will overcome its struggles, including lost sales to competitor Mylan Labs following the FDA approval of its generic version of Teva Pharmaceutical’s top-selling drug, Copaxone. In the fourth quarter, Copaxone’s declining sales caused Teva Pharmaceutical’s revenue to tumble 16% and its non-GAAP EPS to slide 32.6% from Q4 of 2016. The damage continued in Q1, when a 40% drop in Copaxone revenue caused revenue and adjusted EPS to slip 10.4% and 11.3%, respectively, versus last year. Eventually, Copaxone will find its footing, and a cost-cutting program and new management could allow the company to pull up from its tailspin. The cost-cutting plan alone could reduce expenses by $3 billion per year, yet it’s hard to say when revenue will level out, especially given the risk of additional Copaxone competitors becoming available. From Berkshire Hathaway’s perspective, the rewards associated with the long-term opportunity for generic drugmakers outweigh the risk. Drug spending continues to increase because of an increasingly larger and older population, and payers’ interest in low-cost alternatives is a huge tailwind for Teva Pharmaceutical over time. Overall, I suspect Warren Buffett and Todd Combs will continue to use any weakness in Teva Pharmaceutical shares as a buy opportunity for Berkshire Hathaway, but in my view, Teva Pharmaceutical is riskiest of these three stocks to add to your portfolio. Until the company’s future becomes clear, perhaps it makes sense to look for other ideas to buy.

Analyst Recommendations:

According to analyst recommendations from Yahoo Finance, the current consensus is a “Hold” in TEVA Stock, with 1 advising a “Strong Buy”, 3 advising a “Buy”, 17 advising a “Hold” and 5 advising a “Underperform”.

I Know First Current Bullish Forecast for TEVA:

The I Know First algorithm is currently bullish for TEVA, as seen in the below forecast. The signal is 112.28 for the 1-year forecast with a predictability of 0.67 – a high value showing significance in the strength of the forecast. It means it has a long track record of accurate one-year forecasts for TEVA’s stock.

The chart above demonstrates a bullish forecast for TEVA stock as the stock performance is positioned above the 10-day moving average in a good agreement with I Know First Algorithmic Forecast.

Past I Know First’s Success With TEVA:

On August 4th, 2017, the I Know First algorithm issued a bearish 7-day forecast for Teva Pharmaceutical Industries (TLV:TEVA). The forecast showed a signal of -425.91 and a predictability of 0.27. As a result, in accordance with the forecast, the company’s stock produced a return of 27.16% over this period, solidifying another quick win by the I Know First algorithm.

This bearish forecast for TEVA was sent to I Know First subscribers on August 4th, 2017

I Know First Algorithm Heatmap Explanation:

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day and can be simplified explained as the correlation-based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.

About Teva Pharmaceutical Industries Limited:

Teva Pharmaceutical Industries Limited (NYSE/TASE: TEVA) is a pharmaceutical company. The Company is engaged in developing, producing and marketing generic medicines and a portfolio of specialty medicines. The Company operates through two segments: Generic medicines and Specialty medicines. The Company develops, manufactures and sells generic medicines in a range of dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments and creams. Its specialty medicines business focuses on delivering a range of solutions to patients and providers through medicines, devices and services in various regions and markets around the world. Its specialty medicines business includes its core therapeutic areas of central nervous system (CNS) and respiratory medicines with a focus on asthma and chronic obstructive pulmonary disease. It also has specialty products in oncology, women’s health and selected other areas.

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